Action against Refco for Order-Taking and
Recordkeeping Violations and for Failing to Supervise

On May 24, 1999, the Commission issued an
order, simultaneously instituting and settling an administrative
proceeding, finding that Refco, Inc., a registered futures commission
merchant (FCM), violated provisions of the Commodity Exchange Act (CEA)
and the Commission's regulations. The order found that Refco failed
to comply with CFTC regulations regarding order-taking and recordkeeping
in handling customer orders. The order also found that Refco failed to
administer a proper supervisory system and failed to investigate
indications of improper handling of trades. The matter arose from the
activities of a registered introducing broker (IB) who placed orders for
thousands of Treasury bond futures and option contracts per day for his
customers through Refco. The IB placed a substantial number of those
orders without providing account identification to Refco. After the
orders were executed, the IB assigned those trades to customer accounts,
directing positions as the IB chose, and sometimes moved trades between
accounts after trades had been assigned and cleared. Refco consented to
the issuance of the order without admitting or denying the findings
contained in it. The CFTC ordered the company to cease and desist from
further violations of the named provisions of the Act and to pay a total
of $7 million. The CFTC ordered the company to pay $6 million of that
amount as a civil monetary penalty and to use the remaining $1 million to
fund a study of issues associated with order transmission and entry
procedures for exchange-traded futures and options and the diligent
supervision of the order and entry process by commodity professionals.
Representatives of National Futures Association (NFA) and the Futures
Industry Institute (FII) will oversee the study. This is the first CFTC
order ever to contain such a provision.

Settlement with Merrill Lynch in Sumitomo
Copper Complaint

In June 1999, the Commission settled an
administrative enforcement action against Merrill Lynch International,
Inc. (Merrill International), and Merrill Lynch Pierce Fenner & Smith
(Brokers & Dealers), Ltd. (Merrill (B&D)). The settling
respondents neither admitted nor denied the allegations in the complaint
or the findings in the order. The CFTC ordered the companies to pay a
civil monetary penalty of $15 million and to cease and desist from
violating, and aiding and abetting violations of, the anti-manipulation
provisions of the CEA. The order further requires the settling
respondents to cooperate with the CFTC in proceedings and any
investigations related to this matter and dismisses the action against
Merrill Lynch & Co., Inc. The order finds that the firms aided and
abetted Sumitomo Corporation of Japan and others: by providing more than
one-half billion dollars of credit and finance which the manipulators
used to purchase and hold a dominant position in futures contracts and
London Metal Exchange warehouse stocks of copper; by providing trading
facilities, accounts, and trading capacity through which the manipulators
acquired their dominant position in a combination of futures contracts
and warehouse stocks and through which the manipulators sold or lent a
small portion of their holdings at artificially high absolute prices and
artificially high backwardated spread differentials; and by providing
trading advice which the manipulators used in the execution of their
strategy of withholding their copper from the market. The order states
that Merrill (B&D) and Merrill International possessed the requisite
knowledge and intent to find that they aided and abetted the
manipulator's violations. In addition, the order finds that Merrill
(B&D) benefited from the manipulation by providing financing, trading
facilities, and credit to the manipulators, and by earning profits
through its proprietary trading.

Streamlined Procedures for New Contract
Designation

In July, the Commission proposed
far-reaching and fundamental changes to its approval procedures for new
futures contracts offered on U.S. exchanges. The Commission proposed a
two-year pilot program to permit the listing of futures and option
contracts on U.S. exchanges prior to CFTC review and approval. The pilot
program responds to the concerns of U.S. exchanges that the ability to
list new contracts without delay is important to the continued
competitiveness of the exchanges, particularly with foreign exchanges.
The proposed pilot procedure would be available to any exchange that is
already approved to trade at least one futures or option contract. Under
the pilot program, exchanges would be required only to file the
contract's terms and conditions with the CFTC by close of business on
the day prior to first listing a new contract and could list trading
months up to one year in the future. The exchange would also be required
to file with the CFTC within 45 days of first listing the contract an
application for approval of the contract. The procedure would not be
available for certain contracts, including stock index contracts, which
require prior concurrence by the Securities and Exchange Commission
(SEC). Exchanges would have a choice of using the pilot procedure or the
current procedures, including fast-track procedures introduced in 1997,
for approval of new futures and option contracts. The Commission adopted
the new contract listing procedures in final form on November 17,
1999.

Streamlined Contract Market Rule Review
Procedures

In July, the Commission proposed further
streamlining of its procedures for reviewing exchange rules. The
Commission proposed to amend its procedures to allow additional
categories of exchange rule amendments to be approved automatically, upon
adoption by the exchange, and to permit such amendments to be submitted
to the Commission in a single weekly, summary filing rather than in
individual submissions. For certain other rules, the time for review
would be reduced to three days. The Commission also reorganized, in a
clearer and more accessible format, the Commission's rules on
expedited approval procedures for proposed rule amendments to exchange
contract terms and conditions. The proposed rules would reduce individual
submissions to the Commission by U.S. exchanges and reduce the burdens
associated with the review and approval process. In November 1999, the
Commission proposed that futures exchanges be allowed to make new rules
and rule amendments effective without prior Commission approval.

Agricultural Trade Option
Proposal

In August 1999, the Commission proposed to
revise rules governing the market for over-the-counter (OTC) options on
agricultural commodities. Agricultural trade options are off-exchange
options on specified domestic agricultural commodities offered to
producers, processors or merchandisers in connection with their business.
The rules permitting the offer and sale of agricultural trade options
that were then current went into effect on June 15, 1998. Those rules,
among other things, required physical delivery of the commodities subject
to the options, required merchants offering these options to register
with the Commission, required risk disclosure to customers, and placed
certain restrictions on the types of options permitted. No one registered
as an agricultural trade option merchant under the June 1998 rules. The
Commission received comments from a number of groups in the agricultural
sector supporting reconsideration of the rules as a means of increasing
interest in the possible offer and sale of these instruments. After
carefully reviewing the rules, the Commission proposed several changes to
allow more flexibility in the types of options that could be offered by
allowing cash settlement, streamlining the reporting and disclosure
requirements, and generally bringing the rules more into line with
practices in the cash markets. In December 1999 the Commission published
final rules implementing these changes.

Revised Speculative Position
Limits

In May 1999, the Commission increased
speculative position limits for various domestic agricultural products
and streamlined certain associated rules. Speculative limit rules limit
the size of positions that speculators may hold in the U.S. futures
markets and have been a key regulatory feature for over 60 years. The
revised rules, which are part of the Commission's ongoing regulatory
reform program, increase the accessibility and clarity of the rules,
making compliance easier to achieve. The revised rules increase the
Commission's speculative position limits only in the deferred trading
months. The size of positions speculators are permitted to hold in the
spot month remains unchanged. In addition, the revised rules simplify and
reorganize associated policies, exemptions, and rules by incorporating
them within a single section of the Commission's rulebook. In
addition, the Commission adopted a new provision which requires a limited
partner with greater than a 25 percent ownership interest in a small
commodity pool whose operator is not registered with the Commission to
aggregate his or her positions with the pool's positions. However,
the limited partner is eligible for an exemption during deferred trading
months.

International Futures Trading

The Commission amended its rules governing
registration, exemption, and disclosure by IBs, commodity pool operators
(CPOs), and commodity trading advisors (CTAs) trading foreign futures and
option contracts on behalf of U.S. clients and pool participants. The
revisions "level the playing field" by requiring IBs, CPOs, and
CTAs to make the same disclosures to U.S. clients and pool participants
regardless of whether the U.S. persons are trading on domestic or foreign
exchanges, with less disclosure required for sophisticated investors. As
part of this amendment, the Commission delegated to the NFA the authority
to review disclosure documents filed under these rules. The Commission
also modified the process by which a foreign person acting in the
capacity of an IB, CTA, or CPO may apply for an exemption from
registration under Rule 30.5.

The Commission also published proposed rule
amendments that would clarify the circumstances in which members of a
foreign board of trade must register with the Commission or obtain an
exemption from registration. The proposed amendments will expand
significantly the ability of U.S. persons to place orders directly with
foreign futures and options brokers without having to sacrifice the
global clearing services provided by a single U.S. FCM.

In addition, the Commission, in June 1999,
instructed the staff to begin processing no-action requests from foreign
boards of trade seeking to place trading terminals in the United States.
The Commission committed to initiating simultaneously processes to
address the comparative regulatory levels between U.S. and foreign
electronic trading systems.

Electronic Recordkeeping and
Signatures

As part of its continuing program to update
its rules, the Commission adopted amendments to its recordkeeping
requirements. The amendments allow recordkeepers to store most required
records in either micrographic or electronic storage media for the full
five-year maintenance period. The amendments harmonize many recordkeeping
requirements for firms regulated by both the CFTC and the SEC. As a
result, recordkeepers will have the flexibility necessary to maximize the
cost reduction and time savings available from improved storage
technology. The adoption of the rule is one in a series of steps the CFTC
has taken to facilitate the use of electronic media technology where
adequate measures exist to safeguard the public interest.

In another acknowledgement of the impact of
technology on business processes, the Commission proposed in August 1999
to permit the use of electronic signatures in lieu of handwritten
signatures in those instances where Commission regulations require the
signature of a customer of an FCM or IB, a participant in a commodity
pool, or a client of a CTA. The proposal is consistent with the approach
taken by Congress and with the Uniform Electronic Transactions Act
recently approved and recommended for adoption in all States by the
National Conference of Commissioners of Uniform State Laws.

Year 2000 Efforts

The Commission developed plans for ensuring
Year 2000 compliance externally by the industry and internally within the
Commission. As part of its external Year 2000 efforts, the Commission
published four advisories from January 1997 through June of 1999 that:
define the steps to a sound Year 2000 preparedness plan (evaluation of
hardware and software readiness, remediation, testing and contingency
planning); clarify the duty of Commission registrants to be Year 2000
compliant; require auditors of FCMs to file with the Commission a special
Year 2000 report as part of their annual report of financial conditions;
require registrants to have written contingency plans in place by
September 30, 1999; and provide guidance on developing such a plan.
During FY 1999, the staff monitored the submission of approximately 200
reports by independent accountants and requested that the Joint Audit
Committee, which is composed of representatives from the self-regulatory
organizations (SROs), include a Year 2000 component in the audit
requirement for exchange member firms.

The Commission monitored the SROs' Year
2000 efforts, conducted on-site visits with SRO Year 2000 teams, and
maintained frequent contact with SRO Year 2000 personnel. In addition,
the Commission forged a relationship with the FIA to help achieve
industry-wide testing, contingency plans, and Year 2000 preparation. The
Commission participates in the President's Council on Year 2000
Conversion, which is responsible for addressing the Year 2000 problem
through a coordinated governmental approach. The Commission has also been
engaged in international Year 2000 initiatives through its participation
in IOSCO and the Joint Year 2000 Council.

Internally, Commission staff developed a
"Business Continuity Contingency Plan" outlining the measures
CFTC will take to prepare for possible Year 2000 problems and to request
additional funds for Year 2000 compliance efforts. Under the Plan, staff
members have worked to ensure that all physical plants and supporting
systems will be operational on January 1, 2000, and, as an alternative,
that staff will have remote access to all mission-critical
systems.

Alternative Execution
Procedures

In a June advisory, the Commission announced
its intention to consider contract market proposals to adopt alternative
execution, or block trading, procedures for large size or other types of
orders on a case-by-case basis. Under a flexible approach to the
requirements of the CEA and the Commission's regulations, each
contract market would retain the discretion to permit alternative
execution procedures. Additionally, each contract market would have the
ability to develop procedures that reflect the particular characteristics
and needs of its individual markets and market participants. In the
Advisory, the Commission encouraged contract markets to solicit the input
of, and coordinate with, various interested parties in developing such
alternative execution procedures for large orders.

Proposed Rules on CTA Performance Data
and Disclosure

The Commission issued proposed amendments to
its rules on the computation, documentation, and disclosure of the past
performance of trading programs offered to the public by CTAs. The issue
of how best to compute the rate of return (ROR) for partially funded, or
"notionally funded," accounts of CTAs has been a subject of
discussion by the Commission and industry participants for many years.
Central to this issue is the question of which amount should be used as
the denominator in the ROR calculation: actual funds or the nominal
account size agreed upon between the CTA and the client to establish the
client's level of trading in the CTA's program. The Commission
proposed rule revisions to provide that ROR be computed by dividing net
performance by the nominal account size. Consistent with this proposed
change in the computational method, the documentation and disclosure
requirements in the proposed rules focus on conveying a numerical sense
of the impact of partial funding on the leverage and volatility
applicable to the client's account. The proposal also seeks to ensure
that customers are not misled as to the amount of actual funds managed by
a CTA.